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Itaú Activity Surprise Index - Declining, but still positive

October 3, 2017

The Brazil subcomponent edged down in September, as labor market releases came in-line with the market’s prospects.

Our Itaú Activity Surprise Index moderated to 0.10 in September, coming from 0.14 in July. Despite another solid industrial production clip, Brazil's component edged down in September, as labor market releases came in-line with analysts’ prospects. The Mexican index fell back to negative territory, as activity lost further momentum. In contrast, Chile’s component surged to 12-month highs, as mining production stopped being a drag.

The Itaú Activity Surprise Index compares trends in economic activity indicators released during the month to what analysts had been expecting for them. It is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means favorable surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility. Surprises in activity often trigger revisions in GDP growth estimates.

Brazil's index moderated to 0.25 in September from 0.33 in the previous month. After three consecutive months of positive surprises, labor market releases in September were more modest. Formal job creation came on the soft side of expectations, as 35 thousand jobs were created in August (mkt: 54 thousand). The nation-wide unemployment rate fell to 12.6% in the same month, matching the median of professional forecasters’ expectations. Even though employment in the informal sector accounted for the bulk of the unemployment decline, formal employment registered a positive contribution for the first time since June 2014. Additionally, broad retail sales (including vehicles and construction material) grew 3.1% year-over-year in July, disappointing the consensual expectation (3.2%). Still, industrial activity figures surprised positively yet again: for the fourth consecutive month, industrial production for the month of July came stronger than anticipated by the market (2.5% year-over-year vs. 1.7%). In all, the data is consistent with a gradual recovery of economic activity.

Mexico's index fell to -0.21 in September, coming from 0.01 in August, as July’s activity indicators surprised to the downside. The IGAE GDP-proxy expanded 1% year-over-year, below median market expectations (1.7%, as per Bloomberg). Industrial output was the main drag, while the services sector posted a minor slowdown. In the same way, retail sales lost further momentum in July: the sales indicator grew a modest 0.4% year-over-year - below the median of market expectations (1%). We expect GDP growth of 2.3% in 2017, unchanged with respect to the previous year. The strengthening of the US economy will likely boost manufacturing, and falling inflation coupled with robust employment will benefit the services sector. Moreover, we believe the headwinds on the construction sector – namely, the uncertainty associated to trade relations with the U.S. and the fiscal cuts – will moderate.

Chile's index rose strongly to 0.14 in September, coming from -0.32 in August. The Imacec GDP-proxy accelerated to 2.8% year-over-year in July, exceeding the median of economists’ projections (2.3%). Mining production stopped being a drag on activity, for the first time since November 2016. Similarly, the unemployment rate for the quarter ending in July reached 6.6%, below the 6.8% Bloomberg market consensus. Overall, as activity shows signs of firming during 3Q17, the expectation of a recovery in the latter part of the year becomes more likely.

Colombia's index went back to positive territory in September (0.04 vs. -0.25 in August). Retail sales gained 3.1% year-over-year in July, above the 2.6% market consensus. The rebound in private consumption is consistent with the mild improvement in consumer confidence recently observed and a significant disinflation vis-à-vis the end of 2016. Likewise, industrial production rebounded to 6.2% year over year in July (-1.7% in June), well above the market consensus (+4%). Taken together, the data releases of September are favorable for the expected recovery in activity; we project GDP growth of 1.6% this year and a further improvement to 2.5% in 2018.

Peru's index dipped to -0.03 inSeptember, coming from 0.21 in August. The GDP proxy grew 1.6% year-over-year in July, disappointing market expectations (2.7%, as per Bloomberg). Nevertheless, growth accelerated at the margin to 6.2% qoq/saar (3.1% in June) and the breakdown reveals a more broad-based recovery. On a positive note, the unemployment rate posted 6.7% in August, somewhat below median market expectations (6.8%). Importantly, employment growth picked up to 3.5% year-over-year (highest growth rate in more than four years), with firmer growth in the number of wage-employed. We project a 2.9% GDP expansion for this year.

Find our surprise indexes on Bloomberg:

LatAm: ITMRLAI

Brazil: ITMRBI

Mexico: ITMRMI

Chile: ITMRCHLI

Colombia: ITMRCOLI

Peru: ITMRPI

Find our surprise indexes on Broadcast:

LatAm: ITSLA

Brazil: ITSBR

Mexico: ITSMX

Chile: ITSCH

Colombia: ITSCO

Peru: ITSPR

Methodology Note

Our Itaú Surprise Index LatAm compares trends in economic activity indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. Previously, the index was built considering the month that each indicator referred to. For instance, February’s industrial production released on March will be incorporated to March’s surprise index (before: February’s index).

The index is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means good surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility.

We build the surprise index for each country using all activity indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, GDP numbers enjoy a higher weight than consumer confidence and PMIs.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregated LatAm Surprise Index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged results are published (example: GDP), the surprise indexes may be revised.